10-QPeriod: Q2 FY2004

MCKESSON CORP Quarterly Report for Q2 Ended Sep 30, 2003

Filed October 30, 2003For Securities:MCK

Summary

McKesson Corporation reported strong revenue growth for the quarter and six months ended September 30, 2003. Total revenues increased by 23% year-over-year for the quarter and 22% for the six-month period, driven primarily by its Pharmaceutical Solutions segment. Net income saw a significant jump of 25% for the quarter and 29% for the six months, indicating improved profitability on the higher revenue base. While the company experienced a $30 million provision for bad debts due to a customer bankruptcy and severance charges, these were partially offset by a $19.7 million reversal of customer settlement reserves and a $15.3 million tax benefit. Overall, the financial performance demonstrates robust top-line growth and effective cost management, leading to enhanced earnings per share.

Key Highlights

  • 1Total revenues increased 23% to $16.8 billion for the quarter and 22% to $33.3 billion for the six months ended September 30, 2003, compared to the prior year.
  • 2Net income rose 25% to $156.5 million for the quarter and 29% to $312.1 million for the six months, showing significant profitability improvement.
  • 3Diluted Earnings Per Share (EPS) grew by 26% to $0.53 for the quarter and 28% to $1.05 for the six months.
  • 4Pharmaceutical Solutions segment revenue increased 24% to $15.8 billion for the quarter, driven by U.S. Healthcare and Canadian distribution.
  • 5Information Solutions segment revenue grew 8% for the quarter, boosted by Horizon Clinicals offerings and the A.L.I. Technologies acquisition.
  • 6The company renegotiated and increased its revolving credit agreement to $650 million and its receivables sale facility to $1.1 billion, enhancing liquidity.
  • 7McKesson announced a new $250 million stock repurchase program, signaling confidence in its financial position and commitment to returning value to shareholders.

Frequently Asked Questions

The substantial revenue growth, up 23% year-over-year for the quarter, was primarily driven by McKesson's Pharmaceutical Solutions segment, which saw a 24% increase. This growth was fueled by strong performance in U.S. Healthcare and Canadian pharmaceutical distribution, as well as a significant 48% increase in U.S. Healthcare sales to customers' warehouses due to new customer agreements.

Despite a $30 million provision for bad debts related to a customer bankruptcy and $9.8 million in severance charges, McKesson improved its net income by 25% for the quarter. This was achieved through strong revenue growth across segments, productivity improvements in operating expenses (especially in Information Solutions and Pharmaceutical Solutions when excluding warehouse sales), and a $19.7 million credit from the reversal of customer settlement reserves. A $15.3 million tax benefit also contributed positively.

McKesson is involved in ongoing litigation, particularly related to accounting improprieties at HBOC. The company states it is not feasible to predict the outcome or estimate potential losses, and that adverse resolutions could have a material impact on its financial position. Additionally, there is an industry-wide investigation into enteral nutritional products, with two employees indicted. While these are significant risks, the company's management has evaluated disclosure controls and found them to be effective.

McKesson has strengthened its liquidity by renegotiating its 364-day revolving credit agreement to $650 million and its revolving receivables sale facility to $1.1 billion. At the end of the quarter, $135 million in short-term borrowings were outstanding, and $200 million was utilized under the receivables sale facility. The company's debt-to-capital ratio remains conservative at 22.1%, well within covenants, indicating a solid financial position to meet future obligations.